Final answer:
Bond prices and interest rates are inversely related; a bond with a longer maturity, such as Bond B with 16 years to maturity, will be more affected by a rise in interest rates compared to Bond A with 5 years to maturity due to the concept of duration.
Step-by-step explanation:
When considering the impact of a rise in interest rates on the price of bonds, it's crucial to understand that bond prices and interest rates are inversely related. Given that both Bond A and Bond B have 7 percent coupons and are priced at par value, a rise in interest rates would cause the prices of both bonds to decrease because new issues would now offer a higher yield. Therefore, existing bonds with lower yields become less desirable and must decrease in price to offer a competitive yield.
The bond that will be more affected by the change in interest rates is the one with the longer maturity, which in this case is Bond B with 16 years to maturity. This is due to the concept of duration, which measures a bond's sensitivity to changes in interest rates. Generally, the longer a bond's duration, the more its price will be affected by changes in interest rates. Thus, if interest rates were to rise by 1.4 percent, you would expect Bond B's price to change more than Bond A's. With a longer time until maturity, there are more cash flows (coupon payments) that would be discounted at the new, higher interest rates, leading to a greater decrease in Bond B's price compared to Bond A.